Andra AP-fonden (AP2), the SEK264.7bn (€28.8bn) Swedish state buffer fund, this week very publicly divested from a range of fossil fuel companies – invoking in the process the “stranded assets” idea popularised by the Carbon Tracker Initiative.
It dumped 20 companies with a value of SEK840m from its portfolio. The companies, whose names aren’t being disclosed, include 12 coal firms and eight oil and gas producers.
According to AP2, the stranded asset risk at the coal firms stems from its belief that demand for the energy source will decline in the future due to its “negative health and environmental impacts.” In the case of the oil and gas firms, AP2 said the risk was linked to their involvement in high-cost projects such tar sands. “The fund believes these companies face serious climate-related financial risks and that it is highly likely that these projects may either be stranded or unprofitable,” the scheme added. Responsible Investor interviewed Eva Halvarsson, Chief Executive of AP2:
Your argument for divesting 20 fossil fuel companies sounds very much like that which we’ve heard from Carbon Tracker? Did you use their research?
Eva Halvarsson: No. I realise that Carbon Tracker has coined the term “stranded assets,” but we were working on this subject even before the term started to be used in the industry. We certainly share Carbon Tracker’s view that stranded assets are a financial risk, but I think we came to this conclusion from different perspectives.
Did you use a consultant to identify the risk?
No. The entire analysis was done internally by a group of four people led by Hans Fahlin, our Chief Investment Officer. Of course, we’ve also been meeting with academia and talking to some of our sustainable asset managers to get their views on the future of fossil fuels. One of the managers I can mention is Generation Investment Management, which was co-founded by the former US Vice President Al Gore.
Until now, no other pension fund associated with the responsible investment movement has actually divested from the fossil fuel sector so conspicuously…
What we wanted to do was to focus more on issues like climate change and diversity in corporate boards. When it comes to climate change, there have been a lot of initiatives in the last few years. But we didn’t want to drown in the pool of initiatives, if I may put it that way. Instead, we wanted to be ahead of the game. The divestment was just one of many decisions we make about our investment portfolio all the time. But the reason we were so public about it is because of all the interest in the fossil fuel debate. Our message is that we believe that the decision was the right one and in keeping with the mandate we have from the Swedish parliament.As a result of your exit from the 20 companies, what is your current exposure to the fossil fuel industry?
Considering our entire energy portfolio whose value is about SEK9bn, the divestment represents about 10% of that volume. Looking at it another way though, we have gotten rid of 90% of companies involved in coal and consumable fuels and two-thirds in oil and gas exploration. This is consistent with the risks that we see at this point, but of course we will continue with the analysis of our portfolio.
What will AP2 now do with the SEK840m in proceeds from the divestment? Will it increase its green investments perhaps?
The answer is that we will not invest the proceeds in any specific renewable companies, but more broadly in other parts of our portfolio. It’s not earmarked money per se. That said, we have SEK11bn allocated to renewable funds and other climate-related investments like green bonds. So the volume is more than what we have in the energy sector.
Do you know if any of the other four AP buffer funds are considering following your divestment example?
We all go about tackling the fossil fuel issue in different ways. But I think that the other fund that has been most public about the issue has been AP4 and its Chief Executive, Mats Andersson. As far as I know, AP4 has been taking a different approach, concentrating on decreasing the carbon footprint of its entire portfolio (RI coverage).
Your peers AP1, AP3 and AP4 have signed up to the Principles for Responsible Investment’s Montreal Carbon Pledge, which obliges the investor to disclose the carbon footprint of the portfolio. Why has AP2 not signed up?
Regarding such pledges in general, it’s important for us to ask if we can live up to it. My feeling, and I point to no one in particular, is that some investors sign up to these pledges but then don’t follow up as thoroughly as we think one should. Regarding Montreal: we haven’t signed it yet, but we’d like to remind the world that already in 2008 and in 2009, we calculated the carbon footprint of our portfolio. The difference is we didn’t publish it at the time. I should also mention that as we were one of the first investors in Generation IM’s funds, we presented our carbon footprint report to Al Gore when he visited our offices in 2009. He was impressed and even said at the time that we were one of the first investors doing such an audit. We have done it again this year and will report the results in the annual report for 2014.
What do you expect from Sweden’s new left-wing government in terms of responsible investment? The Financial Markets Minister, who oversees the AP funds, is from the Green Party…
The new government has inherited a proposal about a restructuring of the AP funds that it needs to decide about in the near future. I think one of the key things that may result is that we get new guidelines for taking sustainability into account though not at the expense of return! I think, however, that that will be a big challenge for the government to formulate such a mandate, as it’s difficult to know what tomorrow’s biggest risks are.